Cost Segregation for Office Buildings

Office buildings default to a 39 year tax life and can vary from small single-tenant office buildings to large multi-tenant office towers. Some have been mere building shells while others have been high-tech facilities costing hundreds of dollars per square foot.

Office buildings tend to experience a high tenant turnover and when the property owner has necessary information the improvements can be retired correctly as tenant spaces are reconfigured. This has only been applicable in situations where the property owner has a basis in the leasehold improvements.

Property that is typically reclassified to 5 year tax lives includes computer cabling, decorative lighting, glued on finishes, removable millwork, telephone systems, certain aspects of the electrical, plumbing and HVAC systems and window coverings. In some cases, partition walls have been reclassified if they are easily removable and reusable. Land improvements are reclassified to a 15 year life.

Accelerating the depreciation on 10% – 30% of the capitalized costs is typical, depending on the type of Office Building, amenities, quality of the finishes, and extent of the site improvements.

Case Study – Multi-Tenant Office Building

Facts

The subject property is a two building, 80,000 square foot complex with a small cafeteria for the tenants. The property was acquired for $6,700,000, placed-in-service in 2019 and sits on a 6 acre site.

As with many office buildings, the site is improved with ample parking, a monument sign and attractive landscaping.

The buildings are four-story, steel frame structures, with a glass curtain wall and built up membrane roofs. Interior finishes such as carpeting, vinyl flooring, painted drywall are commercial grade and the electrical, plumbing, HVAC and millwork are custom to each tenant’s needs.

Execution

The Source Advisors Cost Segregation engineers were engaged to analyze the acquisition cost. They then applied a cost model to allocate the purchase price to various trades and building components. They conducted a thorough inspection of the property where estimates were performed. Key property personnel were also interviewed. A detailed report was delivered, identifying and documenting all of the components that qualify for a shorter tax life.

Result

Source Advisors reclassified 10% or $670,000 as 15-year land improvements and 15% or $1,000,005 as 5-year tangible personal property. This is about average for a Class A office building with mix of professional service tenants.

*Assuming a 35% tax rate, 6% discount rate, and that the property will be held for 39 years